BlackRock’s Rieder: Fed shifted distortions toward the front end of the yield curve

The yield curve’s violent reaction to the Federal Reserve on Wednesday shouldn’t be thought of as a first-day fluke by Chairwoman Janet Yellen. Rather, the rise of intermediate-term Treasury yields is one step in a monetary policy normalization process that will characterize the rest of the year, according to mammoth investment management firm BlackRock.

If last year was all about longer-duration Treasury yields moving higher — the 10-year Treasury
/quotes/zigman/4868283/delayed10_YEAR yield rose more than a full percentage point and now trades at 2.78% – this year is all about the rise at the front end of the curve, according to Rick Rieder, chief investment officer of Fundamental Fixed Income for BlackRock.

Bloomberg

Rick Rieder

“I think this is a very different year for managing fixed income,” he said in a press briefing Thursday.

By comparison the 10-year note and 30-year bond
/quotes/zigman/4868063/delayed30_YEAR had more subdued reactions Wednesday. But last year, that part of the yield curve rose sharply as markets waited for signs about when the central bank would begin winding down its bond-buying stimulus program, which had held down long-term rates.

But it’s also pitting the economic bulls against bond-fund managers that are less sanguine about the pace of U.S. economic improvement. Pimco’s Bill Gross, for example, has suggested that persistently low inflation will keep the Fed on hold until 2016, which makes the one-to-five year sector attractive.

If 2013 was all about the long end of the curve, and 2014 is about the front end, what will 2015 be about? The story will be in the ultra-front end as rate-hikes loom ever closer, imperiling the securities in the one-to-two year part of the curve that most all bond managers still find attractive, Rieder said.

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